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valuation

According to a recent publication by the WWF, the overall value of the oceans is 2.5 trillion US dollars annually:

Working with the eminent scientist Professor Ove Hoegh-Guldberg and in collaboration with leading business consultancy The Boston Consulting Group, WWF looked at the implications that leaders should consider based on current policies and practices. The results illustrate the economic case for ocean conservation in stark terms. The economic value of coastal and oceanic environments is valued conservatively at US$2.5 trillion each year…

I will explain a bit more carefully the difference between a value and a value added, the importance of non-market values, and why forwarding only market valuation in this case may lead to dangerous policies.

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exxon-valdez-540x304On this day, 25 years ago, the oil tanker Exxon Valdez struck a reef and 40.000 tons of crude oil (or 0.3% of today’s world daily production) spilled into the ocean, leading to one of the largest human-caused environmental disasters. After only one week, 90 miles of coast were affected, and after two months roughly 400 miles.

2008912055In the aftermath of this event, several environmental laws were passed, like the Oil Pollution Act of 1990. But the main question at that time was about Contingent Valuation (CV). CV tries to estimate the non-market value of goods. Obviously, since the beaches and the ocean do not have a price attached to them per se, it was important to quantify the costs of the Exxon Valdez oil spill on these natural resources.

A regulation that had just passed a couple of years before that, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, gave the US government the right to sue for non-market values. But what really is the non-market value of “100,000 to as many as 250,000 seabirds, at least 2,800 sea otters, approximately 12 river otters, 300 harbor seals, 247 Bald Eagles, and 22 orcas, and an unknown number of salmon and herring,” as well as an oil spill that “covered 1,300 miles (2,100 km) of coastline,and 11,000 square miles (28,000 km2) of ocean” with significant amounts of oil still being found as of today?

After several court rules, appeals, re-appeals, judgements, re-judgements, as of Dec 2009, Exxon “paid all owed $507.5 million punitive damages, including lawsuit costs, plus interest,” and had spent “an estimated $2 billion cleaning up the spill and a further $1 billion to settle related civil and criminal charges.” I could not find information on the non-market value that the CV had estimated, but it would certainly be interesting to know what number the US government came up with.

In any case, after the Exxon Valdez disaster, the Department of Commerce organized a panel discussion to address the following question: Can CV give reliable estimates of non-market values?

And if you really want to know how the CV methodology is holding up these days, you should go over to our cromulent 🙂 defenders and main contributers to the CV method in environmental economics at http://bit.ly/1afYAGY. What is clear is that, after now 25 years of substantial efforts, CV has become a tool of even mainstream economists and is THE tool to quantify non-market values.

Nevertheless, a lesson to take away is:
Only through a disaster do we tend to become aware of the value of what we have affected or lost. We then try to place a price on it and hope that it corresponds to this value. But the point is that through the disaster we have already lost what we have just valued. It might thus be reasonable to invoke the precautionary principle for any technology that potentially leads to extreme consequences until a thorough Cost-Benefit Analysis has been undertaken.

Trivia:
The Exxon Valdez is the base of the Smokers in Waterworld.

Sian Sullivan from Birkbeck University of London has a nice piece over at http://www.greeneconomycoalition.org/ on whether we should price nature. The main points are that

 “[t]he current ‘green economy’ discourse on ‘valuing nature’ tends to mean the insertion of economic values for ‘nature’ so that calculated units of nature can become more visible in ‘the current economic paradigm’ and thus incentivise ‘greener’ economic preferences… A key question today, then, is whether or not the evaluative framework associated with the current economic paradigm is indeed the appropriate framework to use in attempting to resolve environmental and economic crisis.”

Sian Sullivan then goes to suggest that

“… by making the category of nature more and more legible to capital and market logics we may in fact be enhancing its exposure to market failures… because there is nothing intrinsic to capitalist market logics that encourages ethical behaviour.”

Furthermore, nature

“… can become a new source of monetary income (e.g. through Payments for Ecosystem Services and REDD+ carbon credits), and be leveraged as new forms of value-generating capital asset… it is very unclear how making nature even more legible as capital will counter, rather than intensify, the massive vested interests pulling the world towards greater inequity and environmental volatility.”

I like her discussion, somehow, because her blog makes an economist’s head spin! In a good way. Since it makes us think again about why we use markets or create them and whether that has always the desired effect. Basically, Sian suggests that we should be very careful when we create markets for nature, because these markets may have undesirable side-effects like reducing social norms/ethical behavior, and, by placing a price on nature, we may make it easier to sell nature. While I agree that there is some substitution effect with social norms/ethical behavior, I have a hard time buying (hehe) her second argument on selling out nature. So step-by-step.

Why do we create markets for nature if there were none before? Simply because there were market failures or an absence of property rights that make it necessary to price nature! Thus, if it was previously costless to dumb waste into the ocean and now we put a price on the impact of the waste on the ocean system, then this is raising the costs of the polluters. If this cost is sufficiently high (i.e. higher than e.g. recycling the waste) , then the valuing of nature helped to reduce the impact of waste dumping.

Similarly, if there was a forest and everyone could cut trees as much as one wanted, then a standard tragedy of the commons argument would apply and suggest that the forest will be fully cut down. In contrast, if we now create a market and place property rights on the trees, then we may solve this market failure and reduce the cutting down of the forest. That’s the way in which placing value on nature can enhance sustainability. Cap-and-trade is a similar point to note.

When is Sian right? Certainly if a market makes nature accessible where it was not. For example, for tourism, where a new tourist resorts gets opened up in a resort where there was no tourism before. But I do not believe this is a really relevant example for the valuation of nature that Sian discusses.

One point which I think partly supports Sian’s thoughts is if the valuation of nature is actually badly done. For example, the whole debate in the US on non-use versus use value and contingent evaluation following the Exxon-Valdez crash. However, a market, or a valuation of nature, in this case is still better than none, as it will lead the polluter to pay at least a part of the environmental costs that the polluter created.

Also, if nature turns out, for whatever possible reason, to be a sort of luxury good, meaning a good for which a price increase actually increases demand. I couldn’t come up with any examples though. Somone?

Conclusively, I am not entirely sure what Sian means when she writes that “… by making the category of nature more and more legible to capital and market logics we may in fact be enhancing its exposure to market failures.”

However, I can fully support her thought on the social norms/ethical behavior. This is a point that has been shown by a growing literature. For example, it was shown that asking parents to pay a fine if they pick their kids up late resulted in more parents showing up late since then they paid for it and there was no social norm attached anymore to coming late. Parents felt that they now deserved to come late since they pay for it. There are many, many more examples that point into this adverse reaction, where social norms get undermined once monetary valuations are introduced. But I also believe that sufficiently large monetary costs can more than substitute social norms.

It is also my opinion that, if society can solve problems through culture or social norms or ethical behavior, then this is much preferable than to try solving these problems through monetary incentives. The real problem, therefore, is to find out for which cases monetary incentives undermine social norms so strongly that they make matters worse. In this case, this then also requires that nature is mis-priced, since otherwise monetary incentives could fully substitute social norms. And then we are back to the start: What is a good price for nature? What do we want to achieve?

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